Ginnie Mae And FHA Come Out To Play

Dowdy old Ginnie Mae and the staid Federal Housing Association have stepped up to the plate now that the subprime mortgage industry has struck out. With quietly expanded authority to support loans for borrowers far up the economic scale from their traditional low- and moderate-income mandate, the U.S. government-backed agencies are, at least for now, counteracting the downward pressure on American home prices.

New rules for FHA loan eligibility were evident on Wednesday, when the Mortgage Bankers Association reported a 12.9% jump in applications for loans backed by U.S. government programs such as the FHA and the Veterans Administration last week. This barometer rose to 375.2, nearly three times the previous year's level.

Bill Glavin, special assistant to FHA Commissioner Brian Montgomery, said he "isn't surprised" by the spike. In February, a congressional stimulus package passed and gave the FHA 30 days to come up with new loan limits. In March, the FHA increased its loan maximum to $729,750 from $362,790 for single family-homes and opened up the agency's services to a richer crowd.

Glavin said "newly eligible people are just starting to catch on and apply for these loans." He also said the FHA expects "the number of applications to grow a lot more in coming months." Glavin said, "It's a group that is buying more expensive houses, though there are a lot of people that don't consider themselves affluent who live in $700,000 homes."

As a part of the congressional mandate, the FHA was told to look at the 3,200 metro areas in the United States and offer mortgages up to 125% of the median home price. Glavin said that this has lead to a lot of interest from people in expensive areas like New York, Aspen, San Francisco and coastal California. In 75 areas, the loan limit doubled.

To make the loans possible, Ginnie Mae whipped up a new multiple-issuer pool designated M JM that will absorb "certain higher-balance loans eligible for FHA insurance through Dec. 31, 2008." Veteran's Administration loans may be pooled in any appropriate Ginnie Mae pool regardless of principal balance. As of April 7, loans larger than $999,999 became eligible for pooling into securities.

Ginnie Mae takes pools of government-guaranteed loans targeted to lower-income households and military veterans and turns them into securities that are sold to investors. The same general structure led to a global financial crisis when mortgage brokers made loans to noncreditworthy borrowers and packaged them into bonds. The ultimate lenders had no connection with the borrowers, and the brokers that made the loans had little incentive to make sure that the loans could be repaid. As it turned out, some of them were not, leading an American housing boom to bust, and the ensuing revaluation of mortgage-backed securities and other affected instruments could end up costing investors nearly $1 trillion.

Traditional Ginnie Mae loans are safer than subprime mortgages because the banks that originate them are encouraged by the FHA to work with borrowers to keep them in their homes.

Along with a spike in FHA loans, the Mortgage Bankers Association also reported a 5.4% jump in its seasonally adjusted index of mortgage application activity, to 688.3, from 646.6 during the similar period last year. The index of measuring mortgage refinancing applications for the week ended April 4 rose 3.4%, to 2,724.7, and its home loan index climbed 8.1%, to 384.7.

Jay Brinkmann, an economist at the mortgage bankers group, said there has been a rise in applications for home loans through government-backed agencies over the past few months and "it has to with the demand from consumers with weak credit, who can't get loans through Fannie and Freddie any longer." Although they began as government agencies,
Fannie Mae
and
Freddie Mac
are now private-sector companies without explicit backing from the U.S. Treasury, though it may be that the government would not allow them to fail. The two enterprises, however, have been forced to raise loan standards in the wake of reckless lending and recent scandals. (See "Fannie and Freddie Promise To Play Nice")

The Government National Mortgage Association, as it is properly known, couldn't be reached for comment, but Mr. Brinkman said that Ginnie Mae just securitizes the loans and the VA and FHA decide the terms: "A key responsibility of the FHA is to examine the risks of the loans against the income stream and insurance fees and make sure they are prudently lending."

Certain D.C. players are pushing to expand Ginnie's lending powers which lead to new, and perhaps, not so lucky for-profit bedfellows. (See "The FHA's Private Partners" )

Thomas R. Weakland, acting executive vice president of Ginnie Mae, said at the time of the March 6 announcement: "This new security will enable more borrowers to qualify for safe, affordable FHA-insured loans, which is critically important as the mortgage industry continues to navigate the ongoing market upheaval."

A single-family that costs a million dollars doesn't seem like it should be considered for an "affordable housing" program, but it is. With McMansions eligible and the $600 stimulus checks going out, anything can happen next week.